Attached files
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EX-31.1 - EXHIBIT 31.1 - NNN 2002 VALUE FUND LLC | c92075exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - NNN 2002 VALUE FUND LLC | c92075exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - NNN 2002 VALUE FUND LLC | c92075exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - NNN 2002 VALUE FUND LLC | c92075exv32w2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-51098
NNN 2002 Value Fund, LLC
(Exact name of registrant as specified in its charter)
Virginia | 75-3060438 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
1551 N. Tustin Avenue, Suite 300 | ||
Santa Ana, California | 92705 | |
(Address of principal executive offices) | (Zip Code) |
(714) 667-8252
Registrants telephone number, including area code:
Registrants telephone number, including area code:
N/A
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
As of November 6, 2009, there were 5,960 units of NNN 2002 Value Fund, LLC outstanding.
NNN 2002 VALUE FUND, LLC
(A Virginia limited liability company)
(A Virginia limited liability company)
TABLE OF CONTENTS
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2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
NNN 2002 VALUE FUND, LLC
CONDENSED CONSOLIDATED STATEMENTS OF NET ASSETS
(Liquidation Basis)
As of September 30, 2009 (Unaudited) and December 31, 2008 (Unaudited)
(Liquidation Basis)
As of September 30, 2009 (Unaudited) and December 31, 2008 (Unaudited)
September 30, 2009 | December 31, 2008 | |||||||
ASSETS |
||||||||
Investment in unconsolidated real estate |
$ | 747,000 | $ | 3,401,000 | ||||
Cash and cash equivalents |
368,000 | 385,000 | ||||||
Asset for estimated receipts in excess of estimated costs during liquidation |
986,000 | 194,000 | ||||||
Total assets |
2,101,000 | 3,980,000 | ||||||
LIABILITIES |
||||||||
Commitments and contingencies (Note 8) |
||||||||
Net assets in liquidation |
$ | 2,101,000 | $ | 3,980,000 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
NNN 2002 VALUE FUND, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(Liquidation Basis)
For the Three and Nine Months Ended September 30, 2009 (Unaudited) and 2008 (Unaudited)
(Liquidation Basis)
For the Three and Nine Months Ended September 30, 2009 (Unaudited) and 2008 (Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net assets in liquidation, beginning of period |
$ | 4,013,000 | $ | 5,543,000 | $ | 3,980,000 | $ | 5,928,000 | ||||||||
Changes in net assets in liquidation: |
||||||||||||||||
Changes to asset (reserve) for estimated receipts (costs) in
excess of estimated costs (receipts) during liquidation: |
||||||||||||||||
Operating loss |
1,000 | 3,000 | 17,000 | 45,000 | ||||||||||||
Distributions received from unconsolidated property |
| | | (173,000 | ) | |||||||||||
Change in estimated receipts (costs) in excess of estimated
costs (receipts) during liquidation |
323,000 | 311,000 | 775,000 | 589,000 | ||||||||||||
Changes to reserve for estimated receipts (costs) in excess of
estimated costs (receipts) during liquidation |
324,000 | 314,000 | 792,000 | 461,000 | ||||||||||||
Change in fair value of assets and liabilities: |
||||||||||||||||
Change in fair value of investment in unconsolidated real estate |
(2,235,000 | ) | (1,275,000 | ) | (2,654,000 | ) | (1,938,000 | ) | ||||||||
Change in assets and liabilities due to activity in asset
(reserve) for estimated receipts (costs) in excess of estimated
costs (receipts) during liquidation |
(1,000 | ) | (3,000 | ) | (17,000 | ) | 128,000 | |||||||||
Net decrease in fair value |
(2,236,000 | ) | (1,278,000 | ) | (2,671,000 | ) | (1,810,000 | ) | ||||||||
Change in net assets in liquidation |
(1,912,000 | ) | (964,000 | ) | (1,879,000 | ) | (1,349,000 | ) | ||||||||
Net assets in liquidation, end of period |
$ | 2,101,000 | $ | 4,579,000 | $ | 2,101,000 | $ | 4,579,000 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
NNN 2002 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months ended September 30, 2009 and 2008
(Unaudited)
For the Three and Nine Months ended September 30, 2009 and 2008
(Unaudited)
The use of the words we, us or our refers to NNN 2002 Value Fund, LLC, except where the
context otherwise requires.
1. Organization and Description of Business
NNN 2002 Value Fund, LLC was formed as a Virginia limited liability company on May 15, 2002.
We were organized for the purpose of acquiring all or a portion of up to three unspecified
properties from unaffiliated sellers in accordance with our private placement memorandum dated May
15, 2002, as amended, or our Private Placement Memorandum. We expected to own and operate interests
in the properties acquired for approximately three to five years after the acquisition thereof. As
of September 30, 2009, we owned a 12.3% interest in one unconsolidated property, Congress Center,
located in Chicago, Illinois, or the Congress Center property. The Congress Center property has a
gross leaseable area, or GLA, of approximately 520,000 square feet. As of September 30, 2009, of
the total GLA of the Congress Center property, 84.3% was leased and 78.9% was occupied.
Grubb & Ellis Realty Investors, LLC, or Grubb & Ellis Realty Investors, or our Manager,
manages us pursuant to the terms of an operating agreement, or the Operating Agreement. Our Manager
is primarily responsible for managing our day-to-day operations and assets. While we have no
employees, certain employees and executive officers of our Manager provide services to us pursuant
to the Operating Agreement. Our Manager engages affiliated entities, including Triple Net
Properties Realty, Inc., or Realty, to provide various services for the Congress Center property.
Realty serves as our property manager pursuant to the terms of the Operating Agreement and a
property management agreement, or the Management Agreement. The Operating Agreement terminates upon
our dissolution. The unit holders may not vote to terminate our Manager prior to the termination of
the Operating Agreement or our dissolution, except for cause. The Management Agreement terminates
with respect to the Congress Center property upon the earlier of the sale of such property or ten
years from the date of acquisition. Realty may be terminated with respect to the Congress Center
property without cause prior to the termination of the Management Agreement or our dissolution,
subject to certain conditions, including the payment by us to Realty of a termination fee as
provided in the Management Agreement.
Plan of Liquidation
At a special meeting of our unit holders on September 7, 2005, our unit holders approved our
plan of liquidation. Our plan of liquidation contemplates the orderly sale of all of our assets,
the payment of our liabilities and the winding up of operations and the dissolution of our company.
We engaged Robert A. Stanger & Co., Inc., or Stanger, to perform financial advisory services in
connection with our plan of liquidation, including rendering opinions as to whether our net real
estate liquidation value range estimate and our estimated per unit distribution range were
reasonable. On June 16, 2005, Stanger opined that our net real estate liquidation value range
estimate and our estimated per unit distribution range were reasonable from a financial point of
view. Actual values realized from the sale of our assets and the settlement of liabilities may
differ materially from the amounts estimated. We continually evaluate our interest in the Congress
Center property and adjust our net real estate liquidation value accordingly. It is our policy that
when we execute a purchase and sale agreement or become aware of market conditions or other
circumstances that indicate that our present value materially differs from our expected net sales
price, we will adjust our liquidation value accordingly. Following the approval of our plan of
liquidation by our unit holders, we adopted the liquidation basis of accounting as of August 31,
2005 and for all periods subsequent to August 31, 2005.
Our plan of liquidation gives our Manager the power to sell any and all of our assets without
further approval by our unit holders and provides that liquidating distributions be made to our
unit holders as determined by our Manager. Due to unfavorable conditions in the current real estate
market, we have decided to extend our estimated sale date of the Congress Center property to
December 31, 2010. Although we can provide no assurances, we currently expect to sell our 12.3%
interest in the Congress Center property by December 31, 2010 and anticipate completing our plan of
liquidation by March 31, 2011.
5
NNN 2002 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
2. Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in
understanding our interim unaudited condensed consolidated financial statements. Such financial
statements and accompanying notes are the representations of our management, who are responsible
for their integrity and objectivity. These accounting policies conform to accounting principles
generally accepted in the United States of America, or GAAP, in all material respects, and have
been consistently applied in preparing the accompanying interim unaudited condensed consolidated
financial statements.
Interim Financial Data
Our accompanying interim unaudited condensed consolidated financial statements have been
prepared by us in accordance with GAAP and under the liquidation basis of accounting effective
August 31, 2005, in conjunction with the rules and regulations of the United States Securities and
Exchange Commission, or the SEC. Certain information and footnote disclosures required for annual
financial statements have been condensed or excluded pursuant to SEC rules and regulations.
Accordingly, our accompanying interim unaudited condensed consolidated financial statements do not
include all of the information and notes required by GAAP for complete financial statements. Our
accompanying interim unaudited condensed consolidated financial statements reflect all adjustments,
which are, in our view, of a normal recurring nature and necessary for a fair presentation of our
financial position including net assets in liquidation and changes in net assets in liquidation for
the interim periods. Interim results of operations are not necessarily indicative of the results to
be expected for the full year; such results may be less favorable. In preparing our accompanying
interim unaudited condensed consolidated financial statements, management has evaluated subsequent
events through November 6, 2009 (the financial statement issuance date). Our accompanying interim
unaudited condensed consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and the notes thereto included in our 2008 Annual Report
on Form 10-K, as filed with the SEC on March 9, 2009.
Principles of Consolidation
Our accompanying interim unaudited condensed consolidated financial statements include our
accounts and any variable interest entities, as defined in Financial Accounting Standards Board,
Accounting Standards Codification, or FASB Codification, Topic 810, Consolidation, that we have
concluded should be consolidated. All material intercompany transactions and account balances have
been eliminated in consolidation.
Liquidation Basis of Accounting
As a result of the approval of our plan of liquidation by our unit holders, we adopted the
liquidation basis of accounting as of August 31, 2005 and for all periods subsequent to August 31,
2005. Accordingly, all assets have been adjusted to their estimated fair value (on an undiscounted
basis). Liabilities, including estimated costs associated with implementing our plan of
liquidation, were adjusted to their estimated settlement amounts. Minority interest liabilities
were offset against the respective assets and liabilities. The valuation of our investment in
unconsolidated real estate is based on current contracts, estimates and other indications of sales
value net of estimated selling costs. Estimated future cash flows from property operations were
made based on the anticipated sales date of the asset. Due to the uncertainty in the timing of the
anticipated sale date and the cash flows there from, results of operations may differ materially
from amounts estimated. These amounts are presented in the accompanying interim unaudited condensed
consolidated statements of net assets. The net assets represent the estimated liquidation value of
our assets available to our unit holders upon liquidation. The actual values realized for assets
and settlement of liabilities may differ materially, perhaps in adverse ways, from the amounts
estimated.
We continually evaluate our 12.3% interest in the Congress Center property and adjust our net
real estate liquidation value accordingly. It is our policy that when we execute a purchase and
sale agreement or become aware of market conditions or other circumstances that indicate that our
present estimated liquidation value materially differs from our expected net sale price, we will
adjust our liquidation value accordingly.
6
NNN 2002 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
Segments
FASB Codification Topic 280, Segment Reporting, establishes standards for reporting financial
and descriptive information about an enterprises reportable segments. We have determined that we
have one reportable segment, with activities related to investing in an unconsolidated office
building. As such, our operations have been aggregated into one reportable segment for the three
and nine months ended September 30, 2009 and 2008.
Recently Issued Accounting Pronouncements
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles
a Replacement of FASB Statement No. 162 (now contained in FASB Codification Topic 105). FASB
Codification Topic 105 establishes that the FASB Codification will become the single official
source of authoritative U.S. GAAP, other than guidance issued by the SEC. Following this statement,
the FASB will not issue new standards in the form of Statements, Staff Positions or Emerging Issues
Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates. All guidance
contained in the Codification carries an equal level of authority. The GAAP hierarchy will be
modified to include only two levels of GAAP: authoritative and non-authoritative. All
non-grandfathered, non-SEC accounting literature not included in the Codification will become
non-authoritative. The Codification, which changes the referencing of financial standards, becomes
effective for interim and annual periods ending on or after September 15, 2009. We adopted FASB
Codification Topic 105 in the quarter ended September 30, 2009 and it did not have a material
impact on our consolidated financial statements.
3. Asset (Reserve) for Estimated Receipts (Costs) in Excess of Estimated Costs (Receipts) during Liquidation
Under the liquidation basis of accounting, we are required to estimate the cash flows from
operations and accrue the costs associated with implementing and completing our plan of
liquidation. Our Manager has agreed to bear all costs associated with public company filings,
including legal, accounting and liquidation costs. We currently estimate that we will have
operating cash inflows from our estimated receipts in excess of the estimated costs during
liquidation. These amounts can vary significantly due to, among other things, the timing and
estimates for executing and renewing leases, along with the estimates of tenant improvements
incurred and paid, the timing of the sale of the Congress Center property, the timing and amounts
associated with discharging known and contingent liabilities and the costs associated with winding
up our operations. These costs are estimated and are expected to be paid over the remaining
liquidation period.
Effective July 1, 2008, monthly distributions to the Congress Center propertys investors were
suspended, including distributions to us. As a result of this suspension of monthly distributions,
our sole source of cash flow is expected to be proceeds from the anticipated sale of the Congress
Center property. It is anticipated that funds previously used for distributions will be applied by
the Congress Center property towards future tenanting costs to lease spaces not covered by the
lender reserve and to supplement the lender reserve funding as necessary. Prior to the suspension
of distributions, we received approximately $29,000 per month in distributions from the Congress
Center property.
The change in the asset for estimated receipts in excess of estimated costs during liquidation
for the nine months ended September 30, 2009 was as follows:
Cash Payments | Change in | |||||||||||||||
December 31, 2008 | and (Receipts) | Estimates | September 30, 2009 | |||||||||||||
Assets: |
||||||||||||||||
Estimated net inflows from unconsolidated operating activities |
$ | 1,148,000 | $ | (1,000 | ) | $ | 315,000 | $ | 1,462,000 | |||||||
Liabilities: |
||||||||||||||||
Liquidation costs |
(954,000 | ) | 18,000 | 460,000 | (476,000 | ) | ||||||||||
Total asset for estimated receipts in excess of estimated
costs during liquidation |
$ | 194,000 | $ | 17,000 | $ | 775,000 | $ | 986,000 | ||||||||
7
NNN 2002 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
The change in the asset (reserve) for estimated receipts (costs) in excess of estimated costs
(receipts) during liquidation for the nine months ended September 30, 2008 was as follows:
Cash Payments | Change in | |||||||||||||||
December 31, 2007 | and (Receipts) | Estimates | September 30, 2008 | |||||||||||||
Assets: |
||||||||||||||||
Estimated net inflows from unconsolidated operating activities |
$ | 1,228,000 | $ | (173,000 | ) | $ | 289,000 | $ | 1,344,000 | |||||||
Liabilities: |
||||||||||||||||
Liquidation costs |
(1,491,000 | ) | 45,000 | 300,000 | (1,146,000 | ) | ||||||||||
Total asset (reserve) for estimated receipts (costs) in
excess of estimated costs (receipts) during liquidation |
$ | (263,000 | ) | $ | (128,000 | ) | $ | 589,000 | $ | 198,000 | ||||||
4. Net Assets in Liquidation
Net assets in liquidation decreased by $1,912,000, or $320.81 per unit, to $2,101,000 during
the three months ended September 30, 2009, compared to net assets in liquidation of $4,013,000 as
of June 30, 2009. The primary reason for the decrease in our net assets was due to a decrease in
the liquidation value of $2,235,000 or $375.00 per unit, from our one remaining unconsolidated
property as a result of a decrease in the anticipated sales price, offset by an increase in our
estimated receipts in excess of estimated costs during liquidation of $324,000, or $54.36 per unit,
as a result of changes in estimates of net cash flows of our one remaining unconsolidated property.
Net assets in liquidation decreased by $964,000, or $161.75 per unit, to $4,579,000 during the
three months ended September 30, 2008, compared to net assets in liquidation of $5,543,000 as of
June 30, 2008. The primary reason for the decrease in our net assets was due to a decrease in the
liquidation value of $1,275,000, or $213.93 per unit, from our one remaining unconsolidated
property as a result of a decrease in the anticipated sales price, offset by an increase in the
asset for estimated receipts in excess of estimated costs during liquidation of $314,000, or $52.68
per unit, as a result of changes in estimates of net cash flows of our one remaining unconsolidated
property.
Net assets in liquidation decreased by $1,879,000, or $315.27 per unit, to $2,101,000 during
the nine months ended September 30, 2009, compared to net assets in liquidation of $3,980,000 as of
December 31, 2008. The primary reason for the decrease in our net assets was a decrease in the
liquidation value of our one remaining unconsolidated property of $2,654,000, or $445.30 per unit,
which is a result of a decrease in the anticipated sales price, offset by an increase of $792,000,
or $132.89 per unit, in our estimated receipts in excess of estimated costs during liquidation
caused by the extension of our estimated sale date from December 31, 2009 to December 31, 2010 and
associated changes in estimates of net cash flows of our one remaining unconsolidated property.
Net assets in liquidation decreased by $1,349,000, or $226.34 per unit, to $4,579,000 during
the nine months ended September 30, 2008, compared to net assets in liquidation of $5,928,000 as of
December 31, 2007. The primary reason for the decrease in our net assets was due to a decrease in
the liquidation value of $1,938,000, or $325.17 per unit, from our one remaining unconsolidated
property as a result of a decrease in the anticipated sales price, offset by an increase in the
asset for estimated receipts in excess of estimated costs during liquidation of $461,000, or $77.35
per unit, which is a result of changes in estimates of net cash flows of our one remaining
unconsolidated property.
The net assets in liquidation of $2,101,000 as of September 30, 2009, plus liquidating
distributions to our unit holders of $18,900,000 through September 30, 2009, would result in
liquidating distributions to our unit holders per unit of approximately $3,682.42 for Class A,
$3,510.08 for Class B and $3,375.82 for Class C, of which $3,171.22 per unit for each class has
been paid. These estimates for liquidating distributions per unit include projections of costs and
expenses expected to be incurred during the period required to complete our plan of liquidation.
These projections could change materially based on the timing of the sale, the performance of the
Congress Center property and changes in the underlying assumptions of the projected cash flows.
5. Investment in Unconsolidated Real Estate
As of September 30, 2009 and December 31, 2008, our sole real estate investment is comprised
of a 12.3% interest in the Congress Center property, located in Chicago, Illinois.
8
NNN 2002 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
6. Unit Holders Equity
There are three classes of units, each with different rights with respect to distributions. As
of September 30, 2009 and December 31, 2008, there were 2,000 Class A units, 2,000 Class B units
and 1,960 Class C units issued and outstanding. The rights and obligations of all unit holders are
governed by the Operating Agreement.
Cash from Operations, as defined in the Operating Agreement, is first distributed to all unit
holders pro rata until all Class A unit holders, Class B unit holders and Class C unit holders have
received a 10.0%, 9.0% and 8.0% cumulative (but not compounded) annual return on their contributed
and unrecovered capital, respectively. In the event that any distribution of Cash from Operations
is not sufficient to pay the return described above, all unit holders receive identical pro rata
distributions, except that Class C unit holders do not receive more than an 8.0% return on their
Class C units, and Class B unit holders do not receive more than a 9.0% return on their Class B
units. Excess Cash from Operations is then allocated pro rata to all unit holders on a per
outstanding unit basis and further distributed to the unit holders and our Manager based on
predetermined ratios providing our Manager with a share of 15.0%, 20.0% and 25.0% of the
distributions available to Class A units, Class B units and Class C units, respectively, of such
excess Cash from Operations. We had no excess Cash from Operations for the three and nine months
ended September 30, 2009 and 2008 and our Manager did not receive any such distributions for these
periods.
Cash from Capital Transactions, as defined in the Operating Agreement, is used as follows:
first, to satisfy our debt and liability obligations; second, to pay pro rata to all unit holders
in accordance with their interests until all capital contributions are reduced to zero; and third,
to unit holders in accordance with the distributions as outlined above in the Cash from Operations.
There were no distributions declared during the three and nine months ended September 30, 2009
and 2008. Class A units, Class B units and Class C units have received identical per-unit
distributions in the past; however, distributions, if any, will vary among the three classes of
units in the future.
Following the payment of the monthly April 2005 distribution, the then board of managers of
our Manager decided to discontinue the payment of monthly distributions. To the extent that prior
distributions have not conformed to the distribution priorities, we intend to adjust future
distributions in order to provide overall net distributions consistent with the priority provisions
of the Operating Agreement. Such distributions may be distributions from capital transactions and
may be completed in connection with our plan of liquidation.
7. Related Party Transactions
The Operating Agreement
Pursuant to the Operating Agreement, our Manager or its affiliates are entitled to receive the
following payments and fees described below. These payments and fees were not negotiated at arms
length and may be higher than payments and fees that would have resulted from an arms length
transaction with an unrelated entity.
Expenses, Costs, or Fees
We have agreed to reimburse our Manager and its affiliates for certain expenses, costs and
fees incurred by our Manager, including, without limitation, for the cash payments, certain closing
costs, escrow deposits, loan commitment fees, project studies and travel expenses related to the
analysis and dispositions of our properties. Our Manager did not incur, and therefore, was not
reimbursed for, any such expenses, costs or fees for the three and nine months ended September 30,
2009 and 2008.
Operating Expenses
We have agreed to reimburse our Manager or its affiliates for reasonable and necessary
expenses paid or incurred by our Manager or its affiliates in connection with our operation,
including any legal and accounting costs, and the costs incurred in connection with the disposition
of our properties, including travel, surveys, environmental and other studies and interest expense
incurred on deposits or expenses. In accordance with our plan of liquidation, the then board of
managers of our Manager voted and approved that all costs associated with public company compliance
would be borne by our Manager. As such, our Manager has incurred costs associated with our public
company compliance, but will not be reimbursed for such costs. Our Manager did not incur any
non-public company compliance costs, and therefore, was not reimbursed for any such costs for the
three months ended September 30, 2009 and 2008. For the nine months ended September 30, 2009 and
2008, our Manager incurred and was reimbursed for $21,000 and $4,000, respectively, for non-public
company compliance costs.
9
NNN 2002 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
Distributions to Our Manager
Our Manager is entitled to receive from us distributions that relate to cash from operations
and from capital transactions as discussed in Note 6, Unit Holders Equity. Our Manager did not
receive any such distributions for the three and nine months ended September 30, 2009 and 2008.
Based on the valuation of our one remaining unconsolidated property as of September 30, 2009 and
December 31, 2008, we have reserved an estimated distribution to our Manager of $436,000 and
$905,000, respectively, which is reflected in the asset for estimated receipts in excess of
estimated costs during liquidation in our interim unaudited condensed consolidated statements of
net assets.
The Management Agreement
Pursuant to the Operating Agreement and the Management Agreement, Realty is entitled to
receive the payments and fees described below. These payments and fees were not negotiated at arms
length and may be higher than payments and fees that would have resulted from an arms length
negotiation and transaction with an unrelated entity.
Property Management Fees
We pay Realty, for its services in managing our properties, a monthly property management fee
of up to 5.0% of the gross receipts of revenue of the properties. We did not incur any property
management fees for the three and nine months ended September 30, 2009 and 2008.
Lease Commissions
We pay Realty or its affiliates a leasing commission for its services in leasing any of our
properties an amount equal to 6.0% of the value of any lease entered into during the term of the
Management Agreement and 3.0% with respect to any lease renewal. The value of such leases will be
calculated by totaling the minimum monthly rent for the term of the lease. The term of such leases
will not exceed five years for purposes of the computation and will not include option periods. We
did not incur any lease commissions for the three and nine months ended September 30, 2009 and
2008.
Project Fees
We pay Realty for its services in supervising any construction or repair project in or about
our properties, a construction management fee equal to 5.0% of any amount up to $25,000, 4.0% of
any amount over $25,000 but less than $50,000, and 3.0% of any amount over $50,000, which is
expended in any calendar year for construction or repair projects. We did not incur any
construction management fees for the three and nine months ended September 30, 2009 and 2008.
Real Estate Disposition Fees
We pay Realty a real estate disposition fee equal up to 5.0% of the sales price. Third party
brokers may be entitled up to 80.0% of the 5.0% disposition fee. We did not incur any real estate
disposition fees for the three and nine months ended September 30, 2009 and 2008.
Loan Fees
We pay Realty a loan fee in the amount of 1.0% of the principal amount of all loans obtained
by it for our properties during the term of the Management Agreement. We did not incur any loan
fees for the three and nine months ended September 30, 2009 and 2008.
8. Commitments and Contingencies
Litigation
Neither we or the Congress Center property are presently subject to any material litigation
nor, to our knowledge, is any material litigation threatened against us or the Congress Center
property, which if determined unfavorably to us would have a material adverse effect on our cash
flows, financial condition or results of operations.
10
NNN 2002 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
Environmental Matters
We have a policy for monitoring the Congress Center property for the presence of hazardous or
toxic substances. While there can be no assurance that a material environmental liability does not
exist, we are not currently aware of any environmental liability with respect to the unconsolidated
property that would have a material adverse effect on our cash flows, financial condition or
results of operations. Further, we are not aware of any environmental liability or any unasserted
claim or assessment with respect to an environmental liability that we believe would require
additional disclosure or the recording of a loss contingency.
Unconsolidated Debt
Total mortgage debt of the Congress Center property was $93,836,000 and $94,839,000 as of
September 30, 2009 and December 31, 2008, respectively. Our pro rata share of the mortgage debt was
$11,523,000 and $11,646,000 as of September 30, 2009 and December 31, 2008, respectively.
The Congress Center property is required by the terms of the applicable loan documents to meet
certain minimum loan to value, performance covenants and other requirements. As of September 30,
2009, the Congress Center property was in compliance with all such covenants.
On December 21, 2006, Realty received a termination notice from Employers Reinsurance
Corporation notifying Realty of their intent to exercise their option to terminate their lease for
approximately 67,000 square feet effective January 1, 2008 at the Congress Center property. From
January 1, 2008 and continuing through and including the payment date occurring on December 1,
2011, the lender is entitled to receive $83,000 on a monthly basis from the borrower. In January
2007, Employers Reinsurance Corporation paid $3,773,000 to the lender as an early termination fee
penalty pursuant to their lease agreement. We, along with G REIT Liquidating Trust (successor of G
REIT, Inc.) and T REIT Liquidating Trust (successor of T REIT, Inc.), or our affiliate co-owners,
paid the remaining $27,000 of the early termination fee penalty owed to the lender. As of September
30, 2009, we have advanced $112,000 to the lender for the reserves associated with the early lease
termination. It is anticipated that upon the sale of the Congress Center property, we, along with
our affiliate co-owners, will receive repayment of any advances made to the lender for reserves. In
May 2009, NNN Congress Center, LLC entered into a lease agreement with the Internal Revenue
Service, or IRS, for approximately 28,000 square feet of space previously leased by Employers
Reinsurance Corporation. The lease begins on April 1, 2010, for a period of ten years, seven years
firm, subject to termination rights pursuant to the lease agreement at an annual rate of $31.00 per
square foot. Pursuant to the lease agreement, there are scheduled annual rent increases, and
various rent concessions and commission credits have been given to the IRS in lease years one and
two. We will continue our marketing efforts to re-lease the remaining un-leased space.
Unconsolidated Debt Due to Related Party
On February 1, 2008, the Congress Center property, of which we own a 12.3% interest, entered
into an unsecured loan with NNN Realty Advisors, evidenced by an unsecured promissory note in the
principal amount of $225,000. The unsecured promissory note provided for a maturity date of July
31, 2008, bore interest at a fixed rate of 7.64% per annum and required monthly interest-only
payments for the term of the unsecured loan. All principal together with all accrued interest was
paid in full on June 9, 2008.
Other
Our other commitments and contingencies include the usual obligations of a real estate company
in the normal course of business. In the opinion of management, these matters are not expected to
have a material adverse affect on our financial position and consolidated results of operations.
9. Concentration of Credit Risk
Financial instruments that potentially subject us to a concentration of credit risk are
primarily cash investments and accounts receivable from tenants. Cash is generally placed in money
market accounts and the amount of credit exposure to any one party is limited. We have cash in
financial institutions that is insured by the Federal Deposit Insurance Corporation, or FDIC, up to
$250,000 per depositor per insured bank. As of September 30, 2009 and December 31, 2008, we had
cash accounts in excess of FDIC insured limits. We believe this risk is not significant.
Concentration of credit risk with respect to accounts receivable from tenants is limited. We
perform credit evaluations of prospective tenants and security deposits are obtained upon lease
execution.
11
NNN 2002 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
As of September 30, 2009, we owned a 12.3% interest in the Congress Center property, located
in the state of Illinois. Accordingly, there is a geographic concentration of risk subject to
fluctuations in the states economy.
As of September 30, 2009, we had no consolidated properties, however, five tenants at the
Congress Center property accounted for 10.0% or more of the aggregate annual rental income at that
property as of September 30, 2009, as follows:
Percentage of | Square | Lease | ||||||||||||||
2009 Annual | 2009 Annual | Footage | Expiration | |||||||||||||
Tenant | Base Rent(1) | Base Rent | (Approximately) | Date | ||||||||||||
Department of Homeland Security |
$ | 3,538,000 | 28.6 | % | 76,000 | April 2012 | ||||||||||
North American Co. Life and Health Insurance |
$ | 2,472,000 | 20.0 | % | 101,000 | Feb. 2012 | ||||||||||
Akzo Nobel, Inc. |
$ | 2,131,000 | 17.2 | % | 91,000 | Dec. 2013 | ||||||||||
United States Treasury Department |
$ | 1,677,000 | 13.6 | % | 37,000 | Feb. 2013 | ||||||||||
National Railroad Passenger Corporation |
$ | 1,249,000 | 10.1 | % | 50,000 | Dec. 2011 |
(1) | Annualized rental income is based on contractual base rent set forth in leases in effect as of September 30, 2009. |
As of September 30, 2008, we had no consolidated properties, however, four tenants at the
Congress Center property accounted for 10.0% or more of the aggregate annual rental income at that
property as of September 30, 2008, as follows:
Percentage of | Square | Lease | ||||||||||||||
2008 Annual | 2008 Annual | Footage | Expiration | |||||||||||||
Tenant | Base Rent(1) | Base Rent | (Approximately) | Date | ||||||||||||
Department of Homeland Security |
$ | 3,473,000 | 28.8 | % | 76,000 | April 2012 | ||||||||||
North American Co. Life and Health Insurance |
$ | 2,421,000 | 20.0 | % | 101,000 | Feb. 2012 | ||||||||||
Akzo Nobel, Inc. |
$ | 2,073,000 | 17.2 | % | 91,000 | Dec. 2013 | ||||||||||
United States Treasury Department |
$ | 1,645,000 | 13.6 | % | 37,000 | Feb. 2013 |
(1) | Annualized rental income is based on contractual base rent set forth in leases in effect as of September 30, 2008. |
12
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The use of the words we, us or our refers to NNN 2002 Value Fund, LLC, except where the
context otherwise requires.
The following discussion should be read in conjunction with our financial statements and notes
appearing elsewhere in this Quarterly Report on Form 10-Q. Such financial statements and
information have been prepared to reflect our net assets in liquidation as of September 30, 2009
and December 31, 2008 (liquidation basis), together with the changes in net assets for the three
and nine months ended September 30, 2009 and 2008 (liquidation basis).
Forward-Looking Statements
Historical results and trends should not be taken as indicative of future operations. Our
statements contained in this report that are not historical facts are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results may differ materially from those
included in the forward-looking statements. We intend those forward-looking statements to be
covered by the safe-harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and are including this statement for purposes of
complying with those safe-harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of us, are generally
identifiable by use of the words believe, expect, intend, anticipate, estimate,
project, prospects, or similar expressions. Our ability to predict results or the actual effect
of future plans or strategies is inherently uncertain. Factors which could have an adverse effect
on our operations and future prospects on a consolidated basis include, but are not limited to:
changes in economic conditions generally and the real estate market specifically;
legislative/regulatory changes; availability of capital; changes in interest rates; competition in
the real estate industry; supply and demand for operating properties in our current market areas;
changes in accounting principles generally accepted in the United States of America, or GAAP,
policies and guidelines applicable to us; predictions of the amount of liquidating distributions to
be received by unit holders; statements regarding the timing of asset dispositions and the sales
price we will receive for assets; the effect of the liquidation; our ongoing relationship with our
Manager (as defined below); litigation; and the implementation and completion of our plan of
liquidation. These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Additional information
concerning us and our business, including additional factors that could materially affect our
financial results, is included herein and in our other filings with the United States Securities
and Exchange Commission, or the SEC.
Overview and Background
We were formed on May 15, 2002 as a Virginia limited liability company to purchase, own,
operate and subsequently sell all or a portion of up to three properties. We expected to own our
interests in the properties for approximately three to five years from the date of acquisition of
each asset. At the time of our formation, our principal objectives were to: (i) preserve our unit
holders capital investment; (ii) realize income through the acquisition, operation and sale of the
properties; (iii) make monthly distributions to our unit holders from cash generated from
operations in an amount equal to an 8.0% annual return of our unit holders investment; however,
the distributions among the Class A unit holders, Class B unit holders and Class C unit holders
will vary; and (iv) within approximately three to five years from the respective acquisition of
each asset, subject to market conditions, realize income from the sale of the properties and
distribute the proceeds of such sales to our unit holders.
Grubb & Ellis Realty Investors, LLC, or Grubb & Ellis Realty Investors, or our Manager,
manages us pursuant to the terms of an operating agreement, or the Operating Agreement. Our Manager
is primarily responsible for managing our day-to-day operations and assets. While we have no
employees, certain employees and executive officers of our Manager provide services to us pursuant
to the Operating Agreement. Our Manager engages affiliated entities, including Triple Net Property
Realty Inc., or Realty, to provide various services to Congress Center, located in Chicago,
Illinois, or the Congress Center property, of which we own a 12.3% interest. Realty serves as our
property manager pursuant to the terms of the Operating Agreement and a property management
agreement, or the Management Agreement. The Operating Agreement terminates upon our dissolution.
The unit holders may not vote to terminate our Manager prior to the termination of the Operating
Agreement or our dissolution except for cause. The Management Agreement terminates with respect to
the Congress Center property upon the earlier of the sale of such property or ten years from the
date of acquisition. Realty may be terminated with respect to the Congress Center property without
cause prior to the termination of the Management Agreement or our dissolution, subject to certain
conditions, including the payment by us to Realty of a termination fee as provided in the
Management Agreement.
Business Strategy and Plan of Liquidation
13
As set forth in our registration statement on Form 10, originally filed on December 30, 2004,
as amended, we were not formed with the expectation that we would be an entity that is required to
file reports pursuant to the Exchange Act. We became subject to the registration requirements of
Section 12(g) of the Exchange Act because the aggregate value of our assets exceeded applicable
thresholds and our units were held of record by 500 or more persons at December 31, 2003. As a
result of registration of our securities with the SEC under the Exchange Act, we became subject to
the reporting requirements of the Exchange Act. In particular, we are required to file Quarterly
Reports on Form 10-Q, Annual Reports on Form 10-K, and Current Reports on Form 8-K and otherwise
comply with the disclosure requirements of the Exchange Act applicable to issuers filing
registration statements pursuant to Section 12(g) of that act. As a result of (i) current market
conditions and (ii) the obligation to incur costs of corporate compliance (including, without
limitation, all federal, state and local regulatory requirements applicable to us, including the
Sarbanes-Oxley Act of 2002, as amended), during the fourth quarter of 2004, our Manager began to
investigate whether liquidation would provide our unit holders with a greater return on their
investment than any other alternative. After reviewing the issues facing us, our Manager approved a
plan of liquidation on June 14, 2005, which was thereafter approved by our unit holders at a
special meeting of unit holders on September 7, 2005.
Our plan of liquidation contemplates the orderly sale of all of our assets, the payment of our
liabilities and the winding up of operations and the dissolution of our company. We engaged Robert
A. Stanger & Co., Inc., or Stanger, to perform financial advisory services in connection with our
plan of liquidation, including rendering opinions as to whether our net real estate liquidation
value range estimate and our estimated per unit distribution range were reasonable. On June 16,
2005, Stanger opined that our net real estate liquidation value range estimate and our estimated
per unit distribution range were reasonable from a financial point of view. Actual values realized
for assets and settlement of liabilities may differ materially from the amounts estimated by us or
reflected in Stangers opinion.
We continually evaluate our 12.3% interest in the Congress Center property and adjust our net
real estate liquidation value accordingly. It is our policy that when we execute a purchase and
sale agreement for the sale of our real property asset or become aware of market conditions or
other circumstances that indicate that the present value of our real property asset materially
differs from our expected net sale price, we will adjust our liquidation value accordingly.
Following the approval of our plan of liquidation by our unit holders on September 7, 2005, we
adopted the liquidation basis of accounting as of August 31, 2005 and for all periods subsequent to
August 31, 2005.
Our plan of liquidation gives our Manager the power to sell any and all of our assets without
further approval by our unit holders and provides that liquidating distributions be made to our
unit holders as determined by our Manager. Due to unfavorable conditions in the current real estate
market, we have decided to extend our estimated sale date of the Congress Center property to
December 31, 2010. Although we can provide no assurances, we currently expect to sell our 12.3%
interest in the Congress Center property by December 31, 2010 and anticipate completing our plan of
liquidation by March 31, 2011.
In accordance with our plan of liquidation, the Congress Center property is actively managed
to seek to achieve higher occupancy rates, control operating expenses and maximize income from
ancillary operations and services. However, due to the adoption of our plan of liquidation, we will
not acquire any new properties, and are focused on liquidating our interest in the Congress Center
property.
For a more detailed discussion of our plan of liquidation, including the risk factors and
certain other uncertainties associated therewith, please read our definitive proxy statement filed
with the SEC on August 4, 2005.
Property Dispositions
We did not have any property dispositions during the three and nine months ended September 30,
2009 and 2008.
Critical Accounting Policies
The complete listing of our Critical Accounting Policies was previously disclosed in our 2008
Annual Report on Form 10-K, as filed with the SEC on March 9, 2009.
Interim Financial Data
Our accompanying interim unaudited condensed consolidated financial statements have been
prepared by us in accordance with GAAP, and under the liquidation basis of accounting effective
August 31, 2005, in conjunction with the rules and regulations of the SEC. Certain information and
note disclosures required for annual financial statements have been condensed or excluded pursuant
to
14
SEC rules and regulations. Accordingly, the interim unaudited condensed consolidated financial
statements do not include all of the information and notes required by GAAP for complete financial
statements. Our accompanying interim unaudited condensed consolidated financial statements reflect
all adjustments, which are, in our opinion, of a normal recurring nature and necessary for a fair
presentation of our financial position including net assets in liquidation and changes in net
assets in liquidation for the interim periods. Interim results of operations are not necessarily
indicative of the results to be expected for the full year; such results may be less favorable. Our
accompanying interim unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes thereto included in
our 2008 Annual Report on Form 10-K, as filed with the SEC on March 9, 2009.
Factors Which May Influence Future Changes in Net Assets in Liquidation
Rental Income
The amount of rental income generated by the Congress Center property depends principally on
our ability to maintain the occupancy rates of currently leased space, to lease currently available
space and space available from unscheduled lease terminations at the existing rental rates and the
timing of the disposition of the property. Negative trends in one or more of these factors could
adversely affect our rental income in future periods.
Scheduled Lease Expirations
As of September 30, 2009, the Congress Center property was 84.3% leased to 13 tenants, and
78.9% occupied by 12 tenants. None of the leases for the existing gross leaseable area, or GLA,
expire during 2009. Our leasing strategy through our plan of liquidation focuses on negotiating
renewals for leases scheduled to expire and identifying new tenants or existing tenants seeking
additional space to occupy the GLA for which we are unable to negotiate such renewals.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, and related laws,
regulations and standards relating to corporate governance and disclosure requirements applicable
to public companies have increased the costs of compliance with corporate governance, reporting and
disclosure practices, which are now required of us. In addition, these laws, rules and regulations
create new legal bases for administrative enforcement, civil and criminal proceedings against us in
the case of non-compliance, thereby increasing our risk of liability and potential sanctions. If we
are unable to complete our plan of liquidation by March 31, 2011, we expect that our efforts to
continue to comply with these laws and regulations will involve significant costs, and any failure
on our part to comply could result in fees, fines, penalties or administrative remedies against us,
which could reduce and/or delay the amount of liquidating distributions to our unit holders under
our plan of liquidation. In accordance with our plan of liquidation, the then board of managers of
our Manager voted and approved that all costs associated with public company compliance would be
borne by our Manager. As such, we anticipate that our Manager will pay for any and all costs
related to our compliance with the Sarbanes-Oxley Act, and we will not be required to reimburse our
Manager for such costs.
Changes in Net Assets in Liquidation
Three and Nine Months Ended September 30, 2009 and 2008
Net assets in liquidation decreased by $1,912,000, or $320.81 per unit, to $2,101,000 during
the three months ended September 30, 2009, compared to net assets in liquidation of $4,013,000 as
of June 30, 2009. The primary reason for the decrease in our net assets was due to a decrease in
the liquidation value of $2,235,000 or $375.00 per unit, from our one remaining unconsolidated
property as a result of a decrease in the anticipated sales price, offset by an increase in our
estimated receipts in excess of estimated costs during liquidation of $324,000, or $54.36 per unit,
as a result of changes in estimates of net cash flows of our one remaining unconsolidated property.
Net assets in liquidation decreased by $964,000, or $161.75 per unit, to $4,579,000 during the
three months ended September 30, 2008, compared to net assets in liquidation of $5,543,000 as of
June 30, 2008. The primary reason for the decrease in our net assets was due to a decrease in the
liquidation value of $1,275,000, or $213.93 per unit, from our one remaining unconsolidated
property as a result of a decrease in the anticipated sales price, offset by an increase in the
asset for estimated receipts in excess of estimated costs during liquidation of $314,000, or $52.68
per unit, as a result of changes in estimates of net cash flows of our one remaining unconsolidated
property.
15
Net assets in liquidation decreased by $1,879,000, or $315.27 per unit, to $2,101,000 during
the nine months ended September 30, 2009, compared to net assets in liquidation of $3,980,000 as of
December 31, 2008. The primary reason for the decrease in our net assets was a decrease in the
liquidation value of our one remaining unconsolidated property of $2,654,000, or $445.30 per unit,
which is a result of a decrease in the anticipated sales price, offset by an increase of $792,000,
or $132.89 per unit, in our estimated receipts in excess of estimated costs during liquidation
caused by the extension of our estimated sale date from December 31, 2009 to December 31, 2010 and
associated changes in estimates of net cash flows of our one remaining unconsolidated property.
Net assets in liquidation decreased by $1,349,000, or $226.34 per unit, to $4,579,000 during
the nine months ended September 30, 2008, compared to net assets in liquidation of $5,928,000 as of
December 31, 2007. The primary reason for the decrease in our net assets was due to a decrease in
the liquidation value of $1,938,000, or $325.17 per unit, from our one remaining unconsolidated
property as a result of a decrease in the anticipated sales price, offset by an increase in the
asset for estimated receipts in excess of estimated costs during liquidation of $461,000, or $77.35
per unit, which is a result of changes in estimates of net cash flows of our one remaining
unconsolidated property.
The net assets in liquidation of $2,101,000 as of September 30, 2009, plus liquidating
distributions to our unit holders of $18,900,000 through September 30, 2009, would result in
liquidating distributions to our unit holders per unit of approximately $3,682.42 for Class A,
$3,510.08 for Class B and $3,375.82 for Class C, of which $3,171.22 per unit for each class has
been paid. These estimates for liquidating distributions per unit include projections of costs and
expenses expected to be incurred during the period required to complete our plan of liquidation.
These projections could change materially based on the timing of the sale, the performance of the
Congress Center property and changes in the underlying assumptions of the projected cash flows.
Liquidity and Capital Resources
As of September 30, 2009, our total assets and net assets in liquidation were $2,101,000. Our
ability to meet our obligations is contingent upon the disposition of our asset in accordance with
our plan of liquidation. Management estimates that the net proceeds from the sale of our interest
in the Congress Center property pursuant to our plan of liquidation will be adequate to pay our
obligations; however, we cannot provide any assurance as to the price we will receive for the
disposition of our one remaining asset or the net proceeds therefrom.
Current Sources of Capital and Liquidity
We anticipate, but cannot assure, that our cash flow from operations and sale of our interest
in the Congress Center property will be sufficient during the liquidation period to fund our cash
needs for payment of expenses.
Our plan of liquidation gives our Manager the power to sell any and all of our assets without
further approval by our unit holders and provides that liquidating distributions be made to our
unit holders as determined at the discretion of our Manager. Due to unfavorable conditions in the
current real estate market, we have decided to extend our estimated sale date of the Congress
Center property to December 31, 2010. Although we can provide no assurances, we currently expect to
sell our 12.3% interest in the Congress Center property by December 31, 2010 and anticipate
completing our plan of liquidation by March 31, 2011.
Other Liquidity Needs
We believe that we will have sufficient capital resources to satisfy our liquidity needs
during the liquidation period. We did not pay any liquidating distributions to our unit holders
during the three and nine months ended September 30, 2009. Following payment of the monthly April
2005 distribution, the then board of managers of our Manager decided to discontinue the payment of
monthly distributions. In accordance with our plan of liquidation, our Manager can make liquidating
distributions from proceeds received from the sale of assets at their discretion.
As of September 30, 2009, we estimate that we will have $476,000 of commitments and
expenditures during the liquidation period, comprised mainly of $436,000 in liquidating
distributions to our Manager pursuant to the Operating Agreement. However, there can be no
assurance that we will not exceed the amounts of these estimated expenditures.
An adverse change in the net inflows from unconsolidated operating activities or net proceeds
expected from the liquidation of our one real estate asset may affect our ability to fund these
items and may affect our ability to satisfy the financial performance covenants under our mortgages
on the Congress Center property. If we fail to meet our financial performance covenants and are
unable to reach a satisfactory resolution with the lenders, the maturity dates for the secured
notes on the Congress Center property could be accelerated. Any of these circumstances could
adversely affect our ability to fund working capital, liquidation costs and unanticipated cash
needs.
16
Liquidating distributions will be determined by our Manager in its sole discretion and are
dependent on a number of factors, including the amount of funds available for distribution, our
financial condition, our capital expenditures on the Congress Center property, among other factors
our Manager may deem relevant. To the extent any distributions are made to our unit holders in
excess of accumulated earnings, the excess distributions are considered a return of capital to our
unit holders for federal income tax purposes to the extent of basis in our stock, and generally as
capital gain thereafter.
The stated range of unit holder distributions disclosed in our plan of liquidation are
estimates only and actual results may be higher or lower than estimated. The potential for variance
on either end of the range could occur for a variety of reasons, including, but not limited to: (i)
unanticipated costs could reduce net assets actually realized; (ii) if we wind up our business
significantly faster than anticipated, some of the anticipated costs may not be necessary and net
liquidation proceeds could be higher; (iii) a delay in our liquidation could result in higher than
anticipated costs and net liquidation proceeds could be lower; (iv) circumstances may change and
the actual net proceeds realized from the sale of our interest in the Congress Center property
might be less, or significantly less, than currently estimated, including, among other reasons, the
discovery of new environmental issues or loss of a tenant or tenants; and (v) actual proceeds
realized from the sale of our interest in the Congress Center property may be higher than currently
estimated if market values increase.
Subject to our Managers actions and in accordance with our plan of liquidation, we expect to
meet our liquidity requirements through the completion of the liquidation, through retained cash
flow, disposition of our interest in the Congress Center property, and additional long-term secured
borrowings on the Congress Center property. We do not intend to reserve funds to retire existing
debt upon maturity on the Congress Center property. We will, instead, seek to refinance such debt
at maturity or retire such debt through the disposition of the remaining one unconsolidated
property.
If we experience lower occupancy levels and reduced rental rates at the Congress Center
property, reduced revenues as a result of asset sale, or increased capital expenditures and leasing
costs at the Congress Center property compared to historical levels due to competitive market
conditions for new and renewal leases, the effect would be a reduction of our net assets in
liquidation. This estimate is based on various assumptions, which are difficult to predict,
including the levels of leasing activity at year end and related leasing costs. Any changes in
these assumptions could adversely impact our financial results, our ability to pay current
liabilities as they come due and our other unanticipated cash needs.
Capital Resources
General
Prior to the adoption of our plan of liquidation, our primary sources of capital were our real
estate operations, our ability to leverage any increased market value in the real estate assets we
owned and our ability to obtain debt financing from third parties, including, our Manager or its
affiliates. Prior to July 1, 2008, our primary source of capital was distributions from the
Congress Center property. However, effective July 1, 2008, monthly distributions to the Congress
Center propertys investors were suspended, including distributions to us. As a result of this
suspension of monthly distributions, our sole source of cash flow is expected to be proceeds from
the anticipated sale of the Congress Center property. It is anticipated that funds previously used
for distributions will be applied towards future tenanting costs to lease spaces not covered by the
lender reserve and to supplement the lender reserve funding as necessary. Prior to the suspension
of distributions, we received approximately $29,000 per month in distributions from the Congress
Center property.
The primary uses of cash are to fund liquidating distributions to our unit holders and
operating expenses. We may also regularly require capital to invest in the Congress Center property
in connection with routine capital improvements, and leasing activities, including funding tenant
improvements, allowances and leasing commissions. The amounts of the leasing-related expenditures
can vary significantly depending on negotiations with tenants and the willingness of tenants to pay
higher base rents over the life of their leases.
In accordance with our plan of liquidation, we anticipate our source for the payment of our
liquidating distributions to our unit holders to be primarily from the net proceeds from the sale
of our interest in the Congress Center property.
Financing
As of September 30, 2009 and December 31, 2008, we had no consolidated mortgage loans
outstanding.
We did not have any consolidated restricted cash balances as of September 30, 2009 and
December 31, 2008, held as credit enhancements and as reserves for property taxes, capital
expenditures and capital improvements.
17
On December 21, 2006, Realty received a termination notice from Employers Reinsurance
Corporation notifying Realty of their intent to exercise their option to terminate their lease for
approximately 67,000 square feet effective January 1, 2008 at the Congress Center property. From
January 1, 2008 and continuing through and including the payment date occurring on December 1,
2011, the lender is entitled to receive $83,000 on a monthly basis from the borrower. In January
2007, Employers Reinsurance Corporation paid $3,773,000 to the lender as an early termination fee
penalty pursuant to their lease agreement. We, along with G REIT Liquidating Trust (successor of G
REIT, Inc.) and T REIT Liquidating Trust (successor of T REIT, Inc.), or our affiliate co-owners,
paid the remaining $27,000 of the early termination fee penalty owed to the lender. As of September
30, 2009, we have advanced $112,000 to the lender for the reserves associated with the early lease
termination. It is anticipated that upon the sale of the Congress Center property, we, along with
our affiliate co-owners will receive repayment of any advances made to the lender for reserves. In
May 2009, NNN Congress Center, LLC entered into a lease agreement with the Internal Revenue
Service, or IRS, for approximately 28,000 square feet of space previously leased by Employers
Reinsurance Corporation. The lease begins on April 1, 2010, for a period of ten years, seven years
firm, subject to termination rights pursuant to the lease agreement at an annual rate of $31.00 per
square foot. Pursuant to the lease agreement, there are scheduled annual rent increases, and
various rent concessions and commission credits have been given to the IRS in lease years one and
two. We will continue our marketing efforts to re-lease the remaining un-leased space.
We believe that our cash balance of $368,000 as of September 30, 2009, should provide
sufficient liquidity to meet our cash needs during the next 12 months from September 30, 2009.
While we anticipate that our cash flow from operations will be sufficient to fund our cash needs
for corporate related expenses for the next 12 months, we cannot assure that this will be case.
Unconsolidated Debt
Total mortgage debt of the Congress Center property was $93,836,000 and $94,839,000 as of
September 30, 2009 and December 31, 2008, respectively. Our pro rata share of the mortgage debt was
$11,523,000 and $11,646,000 as of September 30, 2009 and December 31, 2008, respectively.
The Congress Center property is required by the terms of the applicable loan documents to meet
certain minimum loan to value, performance covenants and other requirements. As of September 30,
2009, the Congress Center property was in compliance with all such covenants.
Unconsolidated Debt Due to Related Party
On February 1, 2008, the Congress Center property entered into an unsecured loan with NNN
Realty Advisors, evidenced by an unsecured promissory note in the principal amount of $225,000. The
unsecured promissory note provided for a maturity date of July 31, 2008, bore interest at a fixed
rate of 7.64% per annum and required monthly interest-only payments for the term of the unsecured
loan. All principal together with all accrued interest was paid in full on June 9, 2008.
Commitments and Contingencies
Insurance Coverage
Property Damage, Business Interruption, Earthquake and Terrorism
The insurance coverage provided through third party insurance carriers is subject to coverage
limitations. Should an uninsured or underinsured loss occur, we could lose all or a portion of our
investment in, and anticipated cash flows from, the Congress Center property. In addition, there
can be no assurance that third party insurance carriers will be able to maintain reinsurance
sufficient to cover any losses that may be incurred.
Debt Service Requirements
As of September 30, 2009, all consolidated debt has been repaid in full.
Contractual Obligations
As of September 30, 2009, all consolidated contractual obligations have been repaid in full.
Off-Balance Sheet Arrangements
There are no off-balance sheet transactions, arrangements or obligations (including contingent
obligations) that have, or are reasonably likely to have a current or future material effect on our
financial condition, changes in our financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
18
Inflation
We will be exposed to inflation risk as income from long-term leases is expected to be the
primary source of cash flows from operations. We expect that there will be provisions in the
majority of our tenant leases that would provide some protection from the impact of inflation.
These provisions include rent steps, reimbursement billings for operating expense pass-through
charges, real estate tax and insurance reimbursements on a per square foot allowance. However, due
to the long-term nature of the leases, the leases may not reset frequently enough to cover
inflation.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risks include risks that arise from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that affect market
sensitive instruments. We believe that the primary market risk to which we would be exposed would
be an interest rate risk. As of September 30, 2009, we had no outstanding consolidated debt,
therefore, we believe we have no interest rate or market risk. Additionally, our unconsolidated
debt related to our interest in the Congress Center property is at a fixed interest rate.
There were no material changes in the information regarding market risk that was provided in
our 2008 Annual Report on Form 10-K, as filed with the SEC on March 9, 2009, other than those
listed in Part II, Item 1A. Risk Factors.
Item 4. Controls and Procedures.
Not applicable.
Item 4T. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed in our reports
under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in the U.S. Securities and Exchange
Commission, or the SEC, rules and forms, and that such information is accumulated and communicated
to us, including our Managers president and chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating our disclosure controls
and procedures, we recognize that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives, as
ours are designed to do, and we necessarily were required to apply our judgment in evaluating
whether the benefits of the controls and procedures that we adopt outweigh their costs.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of
September 30, 2009, was conducted under the supervision and with the participation of our Manager,
including our Managers president and chief financial officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act). Based on this evaluation, our Managers president and chief financial officer concluded that
our disclosure controls and procedures, as of September 30, 2009, were effective for the purposes
stated above.
(b) Changes in internal control over financial reporting. There were no changes in our
internal control over financial reporting that occurred during the quarter ended September 30,
2009, that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
19
PART II OTHER INFORMATION
The use of the words we, us or our refers to NNN 2002 Value Fund, LLC, except where the
context otherwise requires.
Item 1. Legal Proceedings.
Litigation
Neither we nor Congress Center, located in Chicago, Illinois, or the Congress Center property,
are presently subject to any material litigation nor, to our knowledge, is any material litigation
threatened against us or the Congress Center property which if determined unfavorably to us would
have a material adverse effect on our cash flows, financial condition or results of operations.
Item 1A. Risk Factors.
There were no material changes from the risk factors previously disclosed in our 2008 Annual
Report on Form 10-K, as filed with the Unites States Securities and Exchange Commission, or the
SEC, on March 9, 2009, except as noted below.
Some or all of the following factors may affect the returns we receive from our investments,
our results of operations, our ability to pay distributions to our stockholders, availability to
make additional investments or our ability to dispose of our investments.
We may delay and/or reduce our liquidating distributions to our unit holders.
As of September 30, 2009, we estimate that our net proceeds from liquidation will be
approximately $21,001,000 (of which $18,900,000 has been paid to our unit holders as of September
30, 2009) and we expect to distribute per unit approximately $3,682.42 for Class A, $3,510.08 for
Class B, and $3,375.82 for Class C in liquidating distributions (of which $3,171.22 per unit for
each class has been paid as of September 30, 2009), which we anticipate paying by March 31, 2011.
However, our expectations about the amount of liquidating distributions that we will make and when
we will make them are based on many estimates and assumptions, one or more of which may prove to be
incorrect. As a result, the actual amount of liquidating distributions we pay to our unit holders
may be more or less than we currently estimate. In addition, the liquidating distributions to our
unit holders may be paid later than we predict.
Our Managers executives and our Manager have conflicts of interest that differ from our unit
holders as a result of the liquidation.
Grubb & Ellis Realty Investors, LLC, or our Manager, its affiliates and employees have
interests in the liquidation that are different from their interests as a unit holder. Our Manager
is aware of these actual and potential conflicts of interest. Some of the conflicts of interest
presented by the liquidation are summarized below.
Our Manager or its affiliates receive compensation under the Operating Agreement and the
Management Agreement, including fees for disposing of our one remaining unconsolidated property.
Our Manager has engaged affiliates of our Manager, to provide a number of services in connection
with our property, including disposing of our one remaining unconsolidated property. In accordance
with our plan of liquidation, our Manager, Triple Net Properties Realty, Inc., or Realty, or
another affiliate of our Manager, will be paid to liquidate our assets pursuant to the Operating
Agreement and the Management Agreement. Such fee will be a selling commission equal to up to 5.0%
of the gross sales price of any of the properties if the terms of the sale are approved by us.
Based on our estimated sales price as of September 30, 2009, we estimate that pursuant to the
Operating Agreement, we will pay fees to our Manager or Realty of approximately $185,000 for
disposing of the Congress Center property. Our Manager or Realty also has agreements with certain
affiliated co-owners of our property, under which our Manager or Realty will also receive fees for
the disposition of the affiliated co-owners interests in the underlying property. Based on our
estimated sales price as of September 30, 2009, we estimate that the total fees that will be
received by our Manager or Realty from the affiliated co-owners will be approximately $1,318,000.
Moreover, if we sell our interest in the Congress Center property to an affiliate of ours or an
affiliate of our Manager, our Manager or Realty may receive additional fees from the purchaser of
the underlying property.
Our Manager is also entitled to receive liquidating distributions pursuant to the Operating
Agreement. As of September 30, 2009, we estimate that our Manager will receive approximately
$436,000 in liquidating distributions.
We may be unable to sell our interest in a limited liability company at our expected value.
Our investment in the Congress Center property is held as a member of a limited liability
company, or LLC, that holds an undivided tenant-in-common, or TIC, interest in the property. Under
the liquidation basis of accounting, we account for this interest at
20
its estimated fair value. As
of September 30, 2009, our proportionate share of the estimated fair value of this property was
$747,000. Because of the nature of joint ownership, we will need to agree with our co-owners on the
terms of the property sale before the sale can be affected. There can be no assurance that we will
agree with our co-owners on satisfactory sales terms for this property. If the parties are unable
to agree, the matter could ultimately be presented to a court of law, and a judicial partition
could be sought. A failure to reach agreement with these parties regarding the sales terms of this
property may delay and/or reduce our liquidating distributions to our unit holders. Additionally,
in order to realize a return on our investment, we presently intend to sell our interest in this
LLC. We may be unable to receive our expected value for this property because we hold a minority
interest in the LLC and thus cannot sell our property interest held in the limited liability
company or the Congress Center property in its entirety.
Our use of borrowings on the Congress Center property could result in its foreclosure and
unexpected debt service expenses upon refinancing, both of which could have an adverse impact on
our operations and cash flow. Additionally, restrictive covenants in our loan documents may
restrict our operating activities.
We rely on borrowings to partially fund capital expenditures and other items. As of September
30, 2009, there was $93,836,000 of debt outstanding related to the Congress Center property, our
proportionate share of which was $11,523,000. Accordingly, we are subject to the risks normally
associated with debt financing, including, without limitation, the risk that our cash flow may not
be sufficient to cover required debt service payments. There is also a risk that, if necessary,
existing indebtedness will not be able to be refinanced or that the terms of such refinancing will
not be as favorable as the terms of the existing indebtedness.
In addition, if we cannot meet our required mortgage payment obligations, the property subject
to such mortgage indebtedness could be foreclosed upon by, or otherwise transferred to, our lender,
with a consequent loss of income and asset value to us. For tax purposes, a foreclosure on our
property would be treated as a sale of the property for a purchase price equal to the outstanding
balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the
mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure,
but we may not receive any cash proceeds.
The mortgage on the Congress Center property contains customary restrictive covenants,
including provisions that limit the borrowing subsidiarys ability, without the prior consent of
the lender, to incur additional indebtedness, further mortgage or transfer the applicable property,
discontinue insurance coverage, change the conduct of its business or make loans or advances to,
enter into any transaction of merger or consolidation with any third party. In addition, any future
lines of credit or loans may contain financial covenants, further restrictive covenants and other
obligations.
If we materially breach such covenants or obligations under the Congress Center loan
agreement, the lender may have the right to seize our income from the property or legally declare a
default on the loan obligation, require us to repay the debt immediately and foreclose on the
property, among other remedies. If we were to breach such covenants or obligations, we may then
have to sell the Congress Center property either at a loss or at a time that prevents us from
achieving a higher price. Any failure to pay our indebtedness when due or failure to cure events of
default could result in higher interest rates during the period of the loan default and could
ultimately result in the loss of the property through foreclosure. Additionally, if the lender were
to seize our income from the property, we would no longer have any discretion over the use of the
income, which may adversely impact our ability to make liquidating distributions to our unit
holders.
Lack of diversification and illiquidity of real estate may make it difficult for us to sell or
recover our investment in the Congress Center property.
Our business is subject to risks associated with investment solely in real estate. Real estate
investments are relatively illiquid. Pursuant to our plan of liquidation, we expect to sell the
Congress Center property by December 31, 2010. However, due to the illiquid nature of real estate
and the short timeframe that we have to sell the Congress Center property, we may not recoup the
estimated fair value we have recorded as of September 30, 2009 by December 31, 2010. We cannot
provide assurance that we will be able to dispose of the Congress Center property by December 31,
2010, which could adversely impact the timing and amount of distributions.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
21
Item 6. Exhibits.
The exhibits listed on the Exhibit Index (following the signatures section of this report) are
included, or incorporated by reference, in this quarterly report.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
NNN 2002 Value Fund, LLC | ||||
By: Grubb & Ellis Realty Investors, LLC, its Manager | ||||
November 6, 2009
|
/s/ Jeffrey T. Hanson | |||
Date
|
Jeffrey T. Hanson | |||
President | ||||
Grubb & Ellis Realty Investors, LLC, | ||||
the Manager of NNN 2002 Value Fund, LLC | ||||
(principal executive officer) | ||||
November 6, 2009
|
/s/ Michael J. Rispoli | |||
Date
|
Michael J. Rispoli | |||
Chief Financial Officer | ||||
Grubb & Ellis Realty Investors, LLC, | ||||
the Manager of NNN 2002 Value Fund, LLC | ||||
(principal accounting officer) |
23
EXHIBIT INDEX
Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately precedes the
exhibits.
The following exhibits are included, or incorporated by reference, in this Quarterly Report on
Form 10-Q for the period ended September 30, 2009 (and are numbered in accordance with Item 601 of
Regulation S-K).
2.1
|
NNN 2002 Value Fund, LLC Plan of Liquidation and Dissolution, as approved by unit holders on September 7, 2005 and as currently in effect (included as Exhibit A to our Definitive Proxy Statement filed on August 4, 2005 and incorporated herein by reference). | |
3.1
|
Articles of Organization of NNN 2002 Value Fund, LLC, dated May 1, 2002 (included as Exhibit 3.1 to our Amendment No. 1 to Form 10 Registration Statement filed on February 28, 2005 and incorporated herein by reference). | |
10.1
|
Operating Agreement of NNN 2002 Value Fund, LLC, (included as Exhibit 10.1 to our Amendment No. 1 to Form 10 Registration Statement filed on February 28, 2005 and incorporated herein by reference). | |
10.2
|
Management Agreement between NNN 2002 Value Fund, LLC and Triple Net Properties Realty, Inc. (included as Exhibit 10.2 to our Amendment No. 1 to Form 10 Registration Statement filed on February 28, 2005 and incorporated herein by reference). | |
31.1*
|
Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2*
|
Certification of Principal Accounting Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1**
|
Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2**
|
Certification of Principal Accounting Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith. | |
** | Furnished herewith. |
24